May 18, 2018

Law allows municipal charities

Legislation aimed at giving Connecticut residents options to work around federal tax law restrictions contains a controversial provision that experts and municipal leaders say could lead to retribution from the IRS, including fines and audits.

Under the Republican federal tax policy signed by President Donald Trump last year, state and local tax, known as SALT, deductions are capped at $10,000 for those who itemize their deductions. Legislation passed by the Connecticut General Assembly on the final day of the legislative session includes a provision that would enable taxpayers to circumvent the federal SALT limit through a charitable donation instead of paying some or all of their property taxes.

Under Connecticut's legislation, proposed by Gov. Dannel P. Malloy, towns can establish a "community-supporting organization" that would be exempt from taxation and organized solely to support municipal expenses for public programs and services, including public education.

Taxpayers would be able to contribute a voluntary and irrevocable cash donation to the organization in exchange for a local property tax credit. The municipality would determine the amount of the tax credit, but it would be limited to the total amount of property tax owed or 85 percent of the donation, whichever is less.

"The Republican tax law is an affront to middle-class Connecticut families and disproportionately hurts families in our state," Malloy spokesman Leigh Appleby said. "In fact, 83 percent of the benefits of this backwards law go to the top 1 percent, leaving middle-class and working people stuck picking up the tab — all while exploding the nation's deficit by more than $1 trillion."

According to the Malloy administration, more than 40 percent of Connecticut residents claim the SALT deduction, averaging nearly $19,000. This puts Connecticut second in the country behind only New York.

New York has passed similar legislation to provide SALT relief, but the measure was met with cautionary response from Jared Walczak, senior policy analyst at the Tax Foundation, who called the charitable provision "legally suspect."

He warned that the workaround could increase a person's tax liability, lead to tax penalties, and also could get taxpayers audited.

"The IRS is highly unlikely to go along with this charade, as these so-called contributions bear none of the hallmarks of genuine charity," he wrote in response to the New York law.

Walczak called the measure "a tax avoidance scheme," which was the same response given by Connecticut's Senate Republican President Pro Tem Leonard A. Fasano, of North Haven, when Malloy proposed the legislation in February.

Municipal leaders are also skeptical.

"There's grave concern that the IRS could just say 'no,'" Coventry Town Manager John Elsesser said, adding that the issue is the personal benefit to the taxpayer.

For example, he said, if a person makes a $300 donation to play in a golf tournament, but the normal cost to play on the course is $100, the player can deduct only $200.

Therefore, if taxpayers are paying the same amount to the community-supporting organization that they would otherwise pay in property taxes, the IRS is not likely to see it as a charitable contribution, Elsesser said.

He said that he doesn't expect the IRS to be flexible, considering the intent of Congress was to limit the SALT deduction.

Coventry has not ruled out the measure as Elsesser has yet to discuss it with the Town Council, but Elsesser said he doesn't want people to donate only to find that their contribution is still taxable.

"It's an intriguing idea, but not ready for primetime yet," he said.

After being advised by the Connecticut Council of Municipalities, Tolland Town Manager Steven R. Werbner said he is recommending no action until the IRS has had a chance to respond.

The concern, he said, would be that people make a contribution that is not determined to be a charitable contribution, which could require refunds and lead to potential penalties for delayed property tax payments.

"At this point, we're going to wait until further information is available," Werbner said.

Manchester Town Manager Scott Shanley said he appreciates the state trying to ease the burden of Connecticut taxpayers, but "I wouldn't be anxious to be the test case" when it comes to the SALT workaround.

"I'm skeptical that the federal government is going to smile upon these kinds of efforts," he said, adding that the liability could fall on municipalities and taxpayers if the IRS takes retribution after contributions have been made.

Rep. Christopher Davis, R-Ellington, said he voted against the tax bill in committee in part because of the community-supporting organization provision.

Although he said he shares the concerns of municipal leaders, if a town's governing body were to approve an organization, it likely wouldn't go into effect until next tax year, giving the IRS time to weigh in.

If the IRS were to determine the contributions would not fall under a charitable donation, "I don't think it makes any sense for any town to move forward with it," Davis said.

The worst-case scenario, he said, would be if a taxpayer made a contribution that was not recognized as a charitable donation, and they did not receive the tax break expected.

Davis raised further concerns about the funds being collected by an organization run by non-elected people and administered outside the normal municipal budget process.

After being amended from the language during the committee process, the legislation unanimously cleared both chambers of the General Assembly.

The Malloy administration remains confident that taxpayers could be provided some relief from the policy.

"The legislation proposed by the governor and passed overwhelmingly by the General Assembly gives municipalities a workable option to ensure their residents aren't double taxed because of the Trump/GOP tax law," Appleby said.

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